A record year

XP Power 2 March 2021 Outlook
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XP Power

A record year

FY20 results

Tech hardware & equipment

2 March 2021

Price

5380p

Market cap

£1,056m

US$1.41:£1

Net debt (£m) at end FY20

17.9

Shares in issue

19.6m

Free float

90%

Code

XPP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.8

14.7

79.3

Rel (local)

5.3

10.2

76.7

52-week high/low

5700p

2130p

Business description

XP Power is a developer and designer of power control solutions with production facilities in China, Vietnam and the US, and design, service and sales teams across Europe, the US and Asia.

Next events

Q1 trading update

13 April

Analyst

Katherine Thompson

+44 (0)20 3077 5730

XP Power is a research client of Edison Investment Research Limited

XP Power reacted quickly to pandemic-related disruption early in 2020, so was well positioned to benefit from a sustained uptick in orders as COVID-19 generated demand for critical care equipment and semiconductors. The company reported a record year for revenue and earnings while reducing net debt; the dividend was reinstated from Q220 as visibility improved. Despite expecting demand to normalise, XP still expects growth in underlying revenues in FY21.

Year end

Revenue (£m)

PBT*
(£m)

Diluted EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/19

199.9

32.3

141.4

55.0

38.1

1.0

12/20

233.3

44.3

198.4

74.0

27.1

1.4

12/21e

227.8

41.5

171.4

94.0

31.4

1.7

12/22e

237.8

44.9

185.3

98.0

29.0

1.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Pandemic-related demand boosts FY20 results

With manufacturing in Asia, XP was early to see the impact of COVID-19 on its operations and supply chain, but this stabilised relatively quickly and the company was able to report record revenues for the year. On the demand side, the pandemic affected healthcare, driving demand for COVID-19-related equipment (XP estimates this generated an extra c £15–20m in orders), as well as driving robust demand from the semiconductor sector, while industrial technology saw reduced demand. Overall, the company expanded gross and operating margins and generated normalised diluted EPS growth of 40% y-o-y. Despite working capital outflows to build inventory to cope with component supply shortages, XP reduced net debt by 57% y-o-y to £18m at year-end.

Demand to moderate in FY21

In FY21, we expect demand from the healthcare sector to normalise. Semiconductor manufacturing equipment demand remains robust, but we note that the sector reacts very quickly to changes in end-customer demand. We expect demand from the industrial technology sector to improve through the year. Management expects underlying revenue growth in FY21, although we expect this to be masked by the strength of sterling versus the dollar. We have slightly increased our FY21e EPS forecast to reflect lower tax rates (we forecast a 14% EPS decline y-o-y) and introduce a forecast for 8% EPS growth in FY22e.

Valuation: Reflects strong performance in FY20

Having gained 79% over the last year, on a P/E basis XP is trading at a premium to both global power-converter companies and UK electronics companies, with a dividend yield at the upper end of the range. The company generates EBITDA and EBIT margins at the top end of both peer groups. Strong cash management during the crisis, which reduced net debt by 57% y-o-y, leaves the company well funded to pursue both organic and acquisitive growth.

Investment summary

Company description: Power control solutions for industry

XP Power designs, manufactures and distributes power converter solutions to original equipment manufacturers (OEMs) in the healthcare, technology and industrial markets. The group has headquarters in Singapore and, to remain close to its global customer base, has a sales, design and engineering presence in the US, Europe and Asia. Unlike many in the industry, XP is vertically integrated; its manufacturing facilities in Asia and the US allow the company to maintain quality control, improve flexibility, reduce product costs and minimise lead times.

Financials: A record year

XP reported 17% revenue growth in FY20, helped by strong demand for critical care equipment in the healthcare sector and a cyclical upturn in the semiconductor equipment sector. Better factory utilisation (despite COVID-19 disruption in Q120) drove gross margin expansion and normalised operating profit increased 31% y-o-y. Lower tax and finance costs further contributed to normalised diluted EPS growth of 40% y-o-y, with EPS 18% ahead of our forecast. Order intake increased 20% y-o-y, resulting in a book-to-bill ratio of 1.11x for FY20. We forecast underlying revenue growth for FY21, although as the dollar has weakened against sterling over the last few months, this translates to a small decline in our reported revenue forecast. We forecast an EPS decline of 14% in FY21e before a resumption in growth of 8% for FY22e.

Exhibit 1: Changes to forecasts

Normalised EPS (p)

PBT (£m)

EBITDA (£m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2020

167.9

198.4

18.2

41.9

44.3

5.8

55.3

56.8

2.8

2021e

169.2

171.4

1.3

42.2

41.5

(1.6)

55.5

54.6

(1.6)

2022e

N/A

185.3

N/A

N/A

44.9

N/A

N/A

58.4

N/A

Source: XP Power, Edison Investment Research

Valuation: Reflects strong performance in a tough year

Over the last year, the shares have gained 79%, reflecting XP’s strong performance on an absolute and, even more so, on a relative basis. On a P/E basis, XP is trading at a premium to both global power converter companies and UK electronics companies, with a dividend yield at the upper end of the range. The company generates EBITDA and EBIT margins at the top end of both peer groups. Strong cash management during the crisis, which reduced net debt by 57% y-o-y, leaves the company well funded to pursue both organic and acquisitive growth.

Sensitivities: Cyclicality, competition, currency

XP Power has cyclical exposure to global industrial, technology, semiconductor and healthcare markets, so is sensitive to end-demand and product development expenditure in these markets. Visibility of customer volumes is limited and, as such, individual customer orders can be volatile. With the majority of XP’s revenues, manufacturing costs and opex US dollar denominated, currency will continue to add volatility to XP’s reported revenues, although it will have less impact at the net income level. XP also has more limited exposure to the euro/sterling exchange rate; to minimise this the company enters into forward contracts. XP competes with large, global industrial companies and low-cost Asian manufacturers.

Company description: Power-control solutions

XP Power designs, manufactures and distributes power converter solutions to OEMs in the industrial, healthcare, semiconductor and technology markets. Power converters take the high-voltage alternating current output from the mains supply and convert it into various lower-voltage, stable direct current outputs that are required to drive most electronic equipment. XP designs and manufactures the majority of its products. XP’s headquarters are in Singapore and it has volume manufacturing facilities in China and Vietnam and specialist high-voltage, high power and radio frequency (RF) power product manufacturing in the US.

Background: Specialist designer and manufacturer

XP was formed as a specialist distributor of power converters in 1988 and listed on the LSE in 2000. In 2002, the board decided to begin developing its own IP and designs, and bought Switching Systems International (US), which designed its own configurable power converters with an outsourced manufacturing model. Since then, XP has continued to develop its own products and brand, built out manufacturing capacity in China and Vietnam and completed the transition from distributor to designer and manufacturer. Recent acquisitions have expanded XP’s product range from low-power AC/DC and DC/DC converters to include high-voltage, low-power converters (EMCO), RF, power products (Comdel) and high-voltage, high-power products (Glassman). XP sells through 27 sales offices and multiple distributors across Europe, Asia and North America and has engineering service functions in Northern California, Germany and Singapore. FY20 revenues were generated in North America (63%), Europe (28%) and Asia (9%).

Powering critical systems across diverse end markets

XP is focused on developing tailored products for applications with high reliability requirements in the technology, industrial, semiconductor and healthcare equipment markets. It avoids developing commodity products for high-volume consumer electronics applications. Products in each end market can have very different lifecycles. For example, a medical device could have a product lifecycle of 10 years or more. Once a power converter is designed into this product, it is likely to remain in it for the full life of the product. On average, the product life cycle is five to seven years. XP’s balanced mix of end customers means it has a fairly high level of revenues that are recurring and exposure to multiple end markets mitigates the risk of individual industry cyclicality.

Exhibit 2: XP Power business model video

Source: XP Power

XP’s focus is on growing the proportion of own-IP, own-manufactured products. This provides control over the quality and cost of product and allows XP to provide customers with tailored solutions. The company operates across two business lines:

Own-manufactured product (c 80% of revenues). Products designed by XP, ownership of 100% of the IP and manufactured in its Chinese, Vietnamese or US facilities. This includes engineered solutions where XP supplies are customised for specific customer end-product design requirements, namely designing and engineering additional casings, metalwork, circuitry, and connectors.

Labelled products (c 20%). Customer requirements identified and product design specified by XP, but products sourced from third-party manufacturers and labelled under the XP brand.

In-house manufacturing well established

The company is vertically integrated; it manufactures power converters and magnetic components in two locations, China and Vietnam, with smaller US facilities acquired through the Comdel and Glassman deals.

Majority of manufacturing in Asia

XP’s first manufacturing facility was built in Kunshan, China in 2006. In addition to making power converters at this facility, XP also produces magnetic components for prototyping and short lead-time contracts. To reduce exposure to rising Chinese labour costs and gain more control over the manufacturing process, XP expanded manufacturing into Vietnam, at a site near Ho Chi Minh City. The first phase was completed in 2011 and started with the production of magnetic components; XP now manufactures virtually all its magnetics requirements in-house. In 2014, the facility also started manufacturing power converters, starting with some of the less complex converters. In Q119, construction of a second facility was completed (Vietnam II, a similar size to Vietnam I).

Exhibit 3: Capacity and utilisation of facilities

Revenue capacity ($m)

2020 utilisation (%)

China

100

50

Vietnam I

70

80

Vietnam II

150

20

Source: XP Power

Shifting volumes to Vietnam

To take advantage of the increased capacity in Vietnam, XP was already moving production of less complex power converters (sub 1.5kW) from China to Vietnam. With US tariffs on the import of components manufactured in China rising from 10% to 25% in Q219, XP accelerated this shift. The Vietnam facility is now capable of manufacturing 2,616 different low voltage products (end 2019: 2,080) and we expect volumes produced in Vietnam to continue to increase as more customers qualify the facility. The facility can, or will be able to, manufacture low-voltage/low-power, high-voltage/low-power and RF products as well as provide engineering services. During FY20, products previously manufactured in Minden, Nevada were shifted to this facility, adding the capability to manufacture 476 different high-voltage modules.

The company intends to maintain its China facility, as this is used for some of the more complex converters and is also useful for production of converters for Chinese customers, who will otherwise incur tariffs on products imported from the US.

Maintaining some specialist facilities in the US

Through the three US acquisitions, XP inherited facilities in the US for the more complex high-voltage, high-power and RF products. As Comdel and Glassman products are typically more complex than XP’s low-power products (and therefore higher value), it makes sense to retain some of the specialist expertise of the US-based manufacturing facilities. In addition, XP maintains a customer-focused engineering services facility in California.

Having closed EMCO’s Minden facility in Nevada in H220, XP has a facility in Gloucester, Massachusetts where it undertakes final assembly and test of Comdel products (component manufacturing is outsourced within the US) and Glassman’s New Jersey manufacturing facility. The company noted that strong demand for RF products led to supply shortages in 2020 and it is increasing capacity at the Comdel facility to meet current levels of demand.

Growth strategy

XP’s strategy to drive revenue and profitability growth and gain market share has been in place and has evolved over a number of years. The current strategy aims to:

develop a market-leading range of competitive products, organically and through selective acquisitions;

target accounts where XP can add value;

increase vertical penetration of target accounts;

build a global end-to-end supply chain that balances high efficiency with market-leading customer responsiveness; and

lead the industry on environmental matters.

Acquisitions filled out the product range

Historically, XP designed and manufactured low-power AC/DC converters, supplying voltages up to 120V, with the majority of products sold supplying voltages up to 48V. As competition from low-cost Asian suppliers has increased, XP has started moving along the complexity scale. While it has invested in engineering resource to develop higher-voltage products, it has made the majority of major product additions via acquisition as it is a much faster route.

In 2015, XP bought EMCO for $12.0m/£7.8m to add high-voltage, low-power converters to its range. EMCO’s DC/DC converters can supply voltages up to 40kV, with the majority of products in the 5–12kV range.

In 2017, XP acquired Comdel for $25.2m/£18.8m to add RF power solutions. Comdel designs RF power supplies, DC power supplies, impedance matching networks, multi-channel synthesisers and electrostatic chuck power supplies. It supplies standard, modified and custom products; due to the complexity of the products, we understand there is a higher proportion of custom work compared to XP’s product range. Its RF power supplies are sold to the semiconductor production equipment, thin film, photovoltaics and induction heating industries.

In 2018, XP acquired Glassman for $47.5m/£35.7m to add high-voltage, high-power products. Typically, its products are used in equipment involved in the ionisation and acceleration of particles – applications include semiconductor production equipment, vacuum/plasma processing, analytical instrumentation, medical diagnostic and test equipment. Glassman has a very comprehensive standard product portfolio and can also provide custom solutions.

The chart below shows how the acquisitions have filled out XP’s product range and highlights the addressable markets for the main product types. The three acquisitions expanded XP’s total addressable market by nearly $2bn.

We believe XP has made the major acquisitions required to build its product portfolio. We expect management to focus on integrating the recent acquisitions and maximise the cross-selling potential of those deals. In terms of future M&A, we expect XP to take an opportunistic approach, making bolt-on acquisitions to add to its product or sector offerings.

Exhibit 4: Product map and addressable markets

Source: XP Power

Developing more custom capability; expanding engineering services

XP aims to have the most comprehensive and up-to-date product range in its target markets. The company introduced 20 new product families in 2020 (versus 32 in 2019). In 2020, XP spent £19.5m on R&D (pre-capitalisation and amortisation), up 14% from the £17.1m spent in 2019.

XP splits its R&D activities between developing new standard products and developing modifications to existing products to meet specific customer requirements. With competition tending to come from Asian manufacturers of low-complexity converters, XP is focused on serving customers with more complex requirements and undertakes custom design work for large customers. It is moving up the value chain by providing engineering solutions that make it easier for the customer to integrate power solutions into their critical systems, including software and firmware that enables the power solution to communicate with the application controlling it. The company is shifting its R&D focus from low-power/low-voltage products to higher-power, higher-voltage and RF products, in particular looking at applications for RF outside of the semiconductor manufacturing equipment market.

XP has built up its engineering services teams globally to provide this face-to-face support during the design process, and has engineering solutions teams in Europe, North America and Asia.

Targeting key accounts: New and existing

XP Power has more than 4,500 direct active customers, of which no customer makes up greater than 14% of revenues and no single project makes up more than 3% of revenues. In 2020, the top 30 customers made up 59% of revenues. XP Power supplies power converters to three key markets: industrial technology, healthcare and semiconductors (see Exhibit 5).

Exhibit 5: End-market breakdown

Sector

FY20 revenue split

Types of products

Industrial technology

40%

Factory automation, automated test equipment, industrial control, 3D printing, test and measurement, instrumentation, hazardous environments, defence, avionics, audio visual broadcast equipment, mobile and wireless communications, computing and data processing.

Healthcare

30%

Medically approved power solutions for use in patient vicinity applications and in the lab environment, including homecare devices, highly efficient convection-cooled designs for low-noise patient area devices and defibrillator-proof DC/DC converters for applied part applications.

Semiconductors

30%

Semiconductor production equipment.

Source: XP Power

Leverage approved supplier status; cross-sell

XP’s in-house manufacturing helps it sign up blue-chip customers, particularly in the medical equipment and semiconductor equipment markets. Stable and secure power supply is so crucial to the operation of these customers’ products they demand complete control over their supply chain and product manufacture to ensure quality. XP has achieved approved or preferred supplier status at a large number of customers, including all of the main healthcare equipment companies, and is now working to expand its share of business at each customer.

The three US acquisitions increased the potential for cross-selling. As XP’s AC/DC converters often provide the DC input for high-voltage DC/DC converters, there is good cross-selling potential for EMCO. Roughly 95% of Comdel’s revenues and 70% of Glassman’s revenues are generated from the semiconductor production equipment sector. In this market XP, Comdel and Glassman have some customers in common, but they do not overlap in terms of products sold. XP is keen to achieve wider vertical penetration at key accounts with its full range of power solutions.

Focus on operational excellence

XP has generated gross margins above 45% and operating margins around 20% since 2010, showing how efficiently the business has been run since shifting to the design and manufacture business model. The company continually looks at ways to maintain and improve this performance. This includes the focus on lean manufacturing, as well as improvements to internal processes to enable XP to share information internally more effectively and provide better customer service. In 2020, the company hired a global supply chain leader and a chief people officer.

In 2018, XP started upgrading its SAP ERP software to SAP S/4 Hana, initially in existing sales operations and the manufacturing facility in Sunnyvale, California. The company delayed implementing the next phase – the manufacturing facilities in Asia – in 2020 due to the disruption caused by COVID-19 and is now planning to roll out the software to this region this year. It will then roll it out to the acquired US facilities in 2022.

Good track record on sustainability issues

In 2009, XP established an environmental committee led by the CEO, which set the goal of leading the industry on environmental matters. XP is a full member of the Responsible Business Alliance. XP incorporated green technologies into the Vietnamese facility and received the Gold Plus rating by the Singapore Building and Construction Authority for non-residential buildings in tropical climates. XP has water and energy saving practices in place throughout the group.

Having manufacturing facilities and products that meet high environmental standards helps XP to win approved supplier status with large OEMs, but its main ongoing contribution to sustainability is to design ever-more efficient power converters. For example, a 95%-efficient product such as the CCM250 only wastes 5% of the input energy, thereby requiring a lower-power input to achieve the same output as a device operating at a lower efficiency. The wasted power is often converted to heat, which in turn requires additional power or physical heat sinks to provide cooling, adding to the upfront and running costs of the product. XP expects that legislation will become more stringent on the efficiency requirements for power converters. Of the 20 new product families introduced in the year, 17 were ultra-high efficiency and/or low standby power designs. Revenues generated from ‘XP Green Power’ products totalled £52.7m in FY20 (+22% y-o-y), 23% of group revenues. In addition, XP sees increasing opportunities to provide solutions for renewable energy systems and controllers and it is already supplying the smart grid market.

Formalising its approach to ESG issues

As described above, XP has worked to reduce its environmental impact (and that of its customers) for many years. As investors and customers increasingly want to know how companies are addressing the wider range of ESG issues, XP is formalising its approach. In 2020 the company engaged with key stakeholders to better understand which aspects of their relationship with XP were most important to them, with a focus on sustainability in particular. This feedback has been incorporated into XP’s sustainability strategy and will be reported in the FY20 annual report.

Market performance and outlook

Exhibit 6 shows the split of revenues by geography and end market over the last two years and the video in Exhibit 7 below describes in more detail the end markets that XP Power serves.

Exhibit 6: Revenues by geography and end market

Europe

FY20

FY19

y-o-y

Asia

FY20

FY19

y-o-y

Semi manufacturing

1.2

0.4

200%

Semi manufacturing

1.8

0.4

350%

Industrial technology

42.8

52

(18%)

Industrial

14.2

16.9

(16%)

Healthcare

21.0

12

75%

Healthcare

5.1

2.7

89%

Total

65.0

64.4

1%

Total

21.1

20.0

6%

North America

Group

Semi manufacturing

66.6

36.6

82%

Semi manufacturing

69.6

37.4

86%

Industrial technology

37.4

47.7

(22%)

Industrial

94.4

116.6

(19%)

Healthcare

43.2

31.2

38%

Healthcare

69.3

45.9

51%

Total

147.2

115.5

27%

Total

233.3

199.9

17%

Source: XP Power. Note: FY20 exchange rate $1.28:£1.

Industrial technology sector: this is the most fragmented market, with very few customers in XP’s top 30. Applications in this sector vary significantly and are mainly driven by new and emerging electronic technologies and high-growth niches rather than traditional areas such as industrial machinery, automotive or mining. This sector declined 19% y-o-y in FY20 as COVID-19 restrictions reduced demand for XP’s end customers’ products, particularly in Q220. The sector experienced shortages of certain components that also held back customers from placing orders. XP noted it was gaining share with existing distributors and adding new distributors (distributors make up c 10% of group revenues).

Healthcare sector: revenue growth from this sector was 51% in FY20. This is normally the least cyclical end market, although strong demand for critical care equipment during the coronavirus pandemic resulted in significantly higher orders and shipments during 2020.

Semiconductor manufacturing sector: this sector started showing improving demand from Q419 and maintained high levels of demand through the year. XP also believes it gained share in this sector as it was designed into new tools. XP saw an 86% revenue increase in FY20 (84% constant currency) after a 21% decline in FY19. Despite its cyclicality, the company views this as a structural growth sector due to demand for chips from applications such as artificial intelligence (AI), internet of things (IoT) and 5G.

Exhibit 7: Video of markets served

Source: XP Power

Long-term growth drivers

Key drivers of market growth include:

Regulation: legislation and consumer pressure are driving OEMs to reduce the power consumption of their products. Legislation also extends to the efficiency of power converters, driving demand for new products. XP’s new products are designed to maximise efficiency.

Healthcare: as the population ages while continuing to grow overall, people are living longer with chronic diseases, driving overall healthcare spending.

Technology: several trends are driving demand for processing power and memory, including IoT, AI, big data, blockchain, augmented and virtual reality, and autonomous vehicles. It is possible the growth of each of these technologies in parallel could reduce the cyclicality of the semiconductor industry.

Alternative energy: technologies are evolving for lighting (eg LEDs) and power generation (eg solar, wind), which all have specific power-conversion needs.

Innovation: customers increasingly need to differentiate their products from the competition. XP’s in-house design capabilities enable it to develop products for niche applications.

Short-term outlook

Industrial market relatively positive

The strength of the industrial market depends on the health of the global economy. Unsurprisingly, manufacturing companies reported a decline in PMI data from March 2020 as the COVID-19 pandemic started to take hold globally. It rebounded relatively quickly with all regions covered in Exhibit 8 exceeding 50 (the level that marks expansion) from July 2020. The second (or third) wave of the pandemic, which has resulted in lockdowns of varying severity around the world, caused the data to dip slightly in October and November, but all areas remain above 50. We would expect that as lockdown restrictions are gradually relaxed around the world during 2021, demand from industrial companies will slowly recover.

Exhibit 8: Manufacturing PMI data – January 2020 to January 2021

Source: IHS Markit

A year of growth forecast for the technology sector

2020 was a year of mixed fortunes for the technology sector. As businesses scrambled to shift their workforces to remote working, sales of PCs and peripherals grew as did demand for data centre servers. From a consumer perspective, devices for home entertainment such as TVs and games consoles were in strong demand, whereas handset sales declined as fewer people felt the need to replace phones.

According to Gartner, the global IT market declined 3.2% in 2020 but is forecast to return to growth of 6.2% in 2021. The semiconductor market benefited from the demand for the devices described above, and according to the WSTS, grew 5.1% in 2020 and is expected to grow a further 8.4% in 2021. This demand helped return the semiconductor equipment market to growth of 15.6% in 2020 (compared to a 9.3% decline in 2019) according to the trade organisation, SEMI. SEMI forecasts further growth of 4.4% in 2021 and 5.8% in 2022.

The changing end demand for semiconductors has resulted in tightness in the supply of certain components. After a significant drop-off in auto sales in H120, demand rebounded in H220 but auto manufacturers have struggled to meet this demand due to a shortage of the type of semiconductor components they require. This has resulted in the temporary shutdown of various auto plants (including GM, Honda and Ford) to allow for component supply to catch up. Customers in other verticals had maintained orders for their requirements through the course of the pandemic, which meant they continue to be prioritised by chip manufacturers.

Changing priorities in the healthcare market

In the last year, the healthcare sector has focused on testing for and treating COVID-19. This has boosted investment in antigen test-related technology, equipment for critical care (eg ventilators and CPAP machines) and imaging tools to diagnose and monitor the illness (CT and X-ray). At the same time, the focus has shifted away from diagnostics and treatment of non-COVID-19-related illness, reflected in reduced orders for other medical imaging tools and advanced therapy equipment. We expect this to reverse in 2021. Siemens Healthineers reported strong Q121 (ending 31 December 2020) results, with revenue up 13% on a like-for-like basis, as demand for standard procedures normalised and pandemic-related business remained strong. It raised its outlook for FY21 (ending 30 September) from 5–8% to 8–12% like-for-like revenue growth. GE Healthcare saw a 1% organic increase in orders in CY20 and Q420, while organic equipment sales were up 8% in CY20 and up 10% in Q420. Philips saw like-for-like revenue growth of 7% for Q420 and 3% for 2020, with order growth of 7% for Q420 and 9% for 2020. It has guided to 5–6% like-for-like sales growth in 2021, with solid growth expected in Diagnosis & Treatment and Personal Health, slightly offset by lower Connected Care sales (this division includes ventilators and monitors).

Competitive positioning

XP sees the following addressable markets for its products:

Low power/low voltage and low power/high voltage: $3.25bn market, of which XP has a c 5.4% share. The share looks relatively low as XP does not operate in the high-volume, low-value commodity power converter markets that supply products such as PCs, laptops and mobile phone chargers, or in the market for inverters used for renewable energy.

RF power: c $1.2bn market of which XP has a c 1% share.

High voltage, high power: c $500m market of which XP has a 2.3% share.

The low market shares that XP has in each area highlights the opportunity the company has to grow revenues by increasing vertical penetration with existing customers as well as signing up new customers.

Exhibit 9 summarises the main competitors in each of the product areas that XP operates in. In the low-power, low-voltage market, XP competes most often with TDK-Lambda and Mean Well and with a number of local Asian suppliers.

Exhibit 9: Competition by product type

Low voltage

High voltage

RF power

Advanced Energy Industries

Advanced Energy Industries

Advanced Energy Industries

Cosel

Crane Co

COMET Holding

Delta Electronics

Matsusada Precision

MKS Instruments

Mean Well

Spellman High Voltage Electronics

TRUMPF Huettinger

TDK Lambda (TDK Corporation)

Source: Edison Investment Research

Sensitivities

XP Power is a global electronics company supplying a broad range of end markets. XP is not immune to economic slowdown, but diversification and the low-cost structure afford XP some earnings resilience versus competitors.

Economic sensitivity: the group has cyclical exposure to global industrial, technology and healthcare markets. Therefore, any slowdown in end-demand in these markets or cutbacks in product development expenditure will have an impact on XP’s revenues.

Order book visibility: the group has around four months of order book visibility at any one time. Therefore, visibility of customer volumes is limited and, as such, individual customer orders can be volatile.

Currency: around 85% of XP’s revenues, c 98% of cost of sales and c 70% of opex are US dollar denominated. XP Power reports in sterling, exposing the company’s results to fluctuations in the US$/£ exchange rate. While moves in the exchange rate will affect reported revenues, the overall impact of currency at the net income level is much less pronounced. To minimise the effect, the company enters into forward contracts.

Large competitors: competition ranges from significantly larger players with big balance sheets through to smaller innovative companies. The deeper pockets of large competitors may make it more difficult for XP to keep pace with product development.

Geopolitical risks: with manufacturing facilities in China and Vietnam, XP is exposed to risks relating to the governments of those countries, such as regulation and tariffs. In addition, the start of the COVID-19 pandemic highlighted how exposed the global manufacturing industry is to disruptions to the supply chain in Asia.

Financials

Review of FY20 results

See Exhibit 10 for details of FY20 results versus our forecasts. XP reported revenue growth of 16.7% for FY20, marginally ahead of the revenue reported in its January trading update. Gross profit increased 22.2% y-o-y, benefiting from high factory utilisation and the shift of production from Minden to Vietnam. This more than offset the £0.9m spent to deal with COVID-19 safety measures. This resulted in an increase in gross margin to 47.2% from 45.1% a year ago, ahead of our 46.1% forecast. Normalised operating profit increased 31.4% y-o-y and was 5% ahead of our forecast. It included £0.6m in one-off income relating to the Singaporean Job Support Scheme. The company benefited from a c £2m reduction in travel costs due to COVID-19 restrictions. This drove margin expansion of 2.2pp to 19.7% for FY20. XP reported a total of £5.4m in exceptional costs made up of £1.9m for the ERP upgrade, £2.3m for restructuring, £0.4m in legal costs, £0.3m relating to acquisitions and a £0.5m fair value loss on currency hedges. Net finance costs were lower than forecast and the tax rate of 11% was well below our 20% estimate (due to deductions for share option awards, the use of tax losses and R&D tax credits), resulting in normalised net income 17% ahead of our forecast and 41.3% higher y-o-y. This translated to a 40.4% y-o-y increase in normalised diluted EPS, 18.2% ahead of our forecast. XP announced a final quarterly dividend of 36p (vs our 34p forecast) payable on 28 April to shareholders at 26 March. This resulted in a full-year dividend of 74p, ahead of our forecast.

Exhibit 10: FY20 results highlights

£'m

FY19a

FY20e

FY20a

Diff

y-o-y

Revenues

199.9

232.9

233.3

0.2%

16.7%

Gross profit

90.1

107.3

110.1

2.6%

22.2%

Gross margin

45.1%

46.1%

47.2%

1.1%

2.1%

EBITDA

44.5

55.3

56.8

2.8%

27.6%

EBITDA margin

22.3%

23.7%

24.3%

0.6%

2.1%

Normalised operating profit

35.0

43.9

46.0

4.9%

31.4%

Normalised operating margin

17.5%

18.8%

19.7%

0.9%

2.2%

Reported operating profit

26.7

33.1

37.4

13.1%

40.1%

Reported operating margin

13.4%

14.2%

16.0%

1.8%

2.7%

Normalised PBT

32.3

41.9

44.3

5.8%

37.2%

Reported PBT

24.0

31.1

35.7

14.9%

48.8%

Normalised net income

27.6

33.2

39.0

17.3%

41.3%

Reported net income

20.5

24.6

31.5

28.1%

53.7%

Normalised basic EPS (p)

144.1

171.1

201.8

18.0%

40.0%

Normalised diluted EPS (p)

141.4

167.9

198.4

18.2%

40.4%

Reported basic EPS (p)

107.0

126.6

163.0

28.8%

52.3%

Dividend per share (p)

55.0

72.0

74.0

2.8%

34.5%

Net debt/(cash)

41.3

18.0

17.9

(0.6%)

(56.7%)

Source: XP Power, Edison Investment Research

Debt continues to reduce; plenty of headroom for M&A

Operating cash flow of £45.6m was marginally below the £46.2m generated in FY19. A working capital inflow of £10.6m in FY19 reversed to a working capital outflow of £6.2m in FY20. While collections were strong at year-end, the company added to inventory through the year to ensure it had sufficient supply of long lead-time components. Tangible capex declined from £4.7m in FY19 to £4.0m in FY20 as the second Vietnam facility was completed in Q119. Capitalised R&D decreased slightly to £7.7m from £8.0m in FY19. Capitalised costs for the SAP ERP upgrade decreased from £3.6m in FY19 to £3.2m in FY20.

The company revised the terms of its revolving credit facility (RCF) in October 2020. It converted $30m of its $60m accordion to committed facilities, taking committed facilities from $120m to $150m and has extended the repayment date by a year to November 2024. At year-end, it had used $43.5m of this facility. The RCF incurs interest at Libor plus 1.2% for the used portion, and Libor plus 0.4–0.5% for the unused portion. XP closed the year with a net debt position (excluding lease liabilities) of £17.9m, down from £41.3m at the end of FY19. The year-end net debt/EBITDA ratio was 0.32x, well within the banking covenant level of 3x. Based on a target net debt/EBITDA ratio of 1-2x and our FY21 EBITDA forecast, XP has debt headroom of up to £91m.

COVID-19 impact felt earlier; demand the main question mark

We wrote this time last year about the challenges XP was facing at its Chinese manufacturing facility, as the Chinese authorities put restrictions in place to get the spread of COVID-19 under control. By 17 February 2020 the facility was open again. The company invested in additional headcount and equipment at the Vietnam facility (which suffered fewer restrictions) to take up some of the slack. XP put in place all necessary safety measures to protect staff and had all facilities operating normally by the end of H120. Supply chain issues were substantially resolved in H120 and the company was able to ramp up production in H220 to deliver, in particular, the orders placed by healthcare customers destined for use in critical care equipment. To improve liquidity during this uncertain time, XP did not pay a final dividend for FY19 or a first quarter dividend for FY20. Dividends were resumed from Q220.

In our view, the main remaining COVID-19 risk is the effect on end-customer demand. We expect healthcare demand to moderate to more normal levels in 2021 as healthcare providers switch their focus back to non-COVID-19 diagnosis and treatment. We expect industrial technology to see demand improve through the year as restrictions are gradually lifted.

XP notes that other than a £0.6m grant received automatically from the Singapore government, it has not furloughed any staff, reduced headcount or taken any other government assistance.

Outlook and changes to forecasts

Exhibit 11: Changes to estimates

£'m

FY21e

FY21e

y-o-y

FY22e

y-o-y

Old

New

Change

New

Revenues

227.4

227.8

0.2%

(2.4%)

237.8

4.4%

Gross profit

104.3

104.5

0.2%

(5.1%)

110.4

5.7%

Gross margin

45.9%

45.9%

0.0%

(1.3%)

46.4%

0.6%

EBITDA

55.5

54.6

(1.6%)

(3.8%)

58.4

6.8%

EBITDA margin

24.4%

24.0%

(0.4%)

(0.4%)

24.5%

0.6%

Normalised operating profit

43.7

43.0

(1.6%)

(6.5%)

46.2

7.3%

Normalised operating margin

19.2%

18.9%

(0.3%)

(0.8%)

19.4%

0.5%

Reported operating profit

40.5

38.3

(5.4%)

2.5%

43.0

12.1%

Reported operating margin

17.8%

16.8%

(1.0%)

0.8%

18.1%

1.2%

Normalised PBT

42.2

41.5

(1.6%)

(6.3%)

44.9

8.0%

Reported PBT

39.0

36.8

(5.6%)

3.2%

41.7

13.1%

Normalised net income

33.5

34.2

2.1%

(12.3%)

37.0

8.1%

Reported net income

31.0

30.3

(2.1%)

(3.7%)

34.3

13.2%

Normalised basic EPS (p)

172.4

174.3

1.1%

(13.6%)

188.4

8.1%

Normalised diluted EPS (p)

169.2

171.4

1.3%

(13.6%)

185.3

8.1%

Reported basic EPS (p)

159.3

154.4

(3.1%)

(5.3%)

174.8

13.2%

Dividend per share (p)

92.0

94.0

2.2%

27.0%

98.0

4.3%

Net debt (excludes lease liabilities)

13.7

18.8

36.6%

4.8%

9.4

(50.0%)

Source: Edison Investment Research

XP received orders worth £258m during the year (+20% y-o-y) resulting in a book-to-bill ratio of 1.11x for the year. For Q420, order intake of £55.9m (-0.7% q-o-q, -4.3% y-o-y) resulted in a book-to-bill of 0.94x for the quarter. XP closed FY20 with a backlog worth £124.1m. Management expects to see another year of underlying revenue growth, although we note the weakness of the US dollar versus sterling means we are forecasting a decline in reported revenues.

As well as introducing FY22 forecasts, we have made the following changes:

Operating costs: we have slightly increased our FY21 forecast to reflect the spend in FY20.

Net financial cost: we have reduced this in FY21 to reflect the lower net debt position at the end of FY20.

Tax: we have reduced our forecast rate to 17% (company guidance 16–18%) from 20%.

Capex: we have increased our forecast for FY21, reflecting company guidance, noting that spend in FY20 was lower than expected.

Valuation

There is a limited number of listed power converter companies, as many businesses are part of larger industrial companies, such as TDK or GE. We show below the financial performance of those listed peers and a group of UK-listed companies active in the electronics space. XP clearly generates EBITDA and EBIT margins at the top end of both peer groups. On a P/E basis, XP is trading at a premium to both groups, with a dividend yield at the upper end of the range.

Exhibit 12: Financial metrics versus peers

Market

Share price

Listing

Revenue growth

EBITDA margin

EBIT margin

cap (m)

price

currency

LY

CY

NY

LY

CY

NY

LY

CY

NY

XP Power

1056

5380

GBp

16.7%

-2.4%

4.4%

24.3%

24.0%

24.5%

19.7%

18.9%

19.4%

Cosel

39462

1105

JPY

-14.4%

11.6%

5.6%

12.9%

16.8%

17.1%

Delta Electronics

728611

280.5

TWD

5.4%

11.6%

9.3%

16.7%

17.4%

17.8%

11.1%

12.0%

12.6%

Advanced Energy Industries

4000

104.45

USD

79.5%

6.5%

7.5%

19.2%

18.8%

19.8%

17.2%

17.8%

18.6%

Comet Holdings

1662

213

CHF

6.5%

11.9%

15.9%

18.2%

19.8%

13.7%

15.5%

Diploma

2887

2318

GBp

-1.2%

36.9%

8.1%

17.2%

19.5%

19.8%

16.2%

17.7%

18.1%

Electrocomponents

4558

970

GBp

3.7%

-0.7%

10.7%

12.8%

11.9%

13.9%

11.3%

9.4%

11.6%

Gooch & Housego

322

1287.5

GBp

-5.5%

1.3%

3.2%

16.0%

16.0%

17.1%

9.2%

8.5%

11.6%

TT Electronics

354

203

GBp

-9.8%

8.1%

5.0%

9.8%

11.1%

12.3%

5.9%

7.1%

8.7%

Average power converter companies

19.2%

10.4%

9.6%

16.3%

17.8%

18.6%

14.2%

14.5%

15.6%

Average UK electronics companies

-3.2%

11.4%

6.8%

13.9%

14.6%

15.8%

10.6%

10.7%

12.5%

Source: Edison Investment Research, Refinitiv. Note: At 1 March.

Exhibit 13: Valuation metrics

P/E (x)

EV/EBIT (x)

Dividend yield (%)

LY

CY

NY

LY

CY

NY

LY

CY

NY

XP Power

27.1

31.4

29.0

23.4

25.0

23.3

1.4%

1.7%

1.8%

Cosel

145.2

18.3

16.3

1.8%

1.8%

2.1%

Delta Electronics

28.7

23.3

20.2

23.7

19.6

17.1

2.0%

2.4%

2.7%

Advanced Energy Industries

20.0

18.2

16.3

15.8

14.3

12.7

0.0%

0.0%

0.0%

Comet Holdings

59.7

37.1

28.1

27.7

21.2

0.5%

0.8%

1.0%

Diploma

41.1

30.6

27.7

31.2

20.8

18.8

1.3%

1.5%

1.6%

Electrocomponents

25.8

32.7

24.8

21.2

25.6

18.8

1.6%

2.0%

1.7%

Gooch & Housego

42.6

35.2

30.9

30.1

32.1

22.7

0.0%

0.9%

1.0%

TT Electronics

19.1

14.1

11.2

17.4

13.4

10.5

2.3%

2.9%

3.4%

Average power converter companies

63.4

24.2

20.2

19.7

20.5

17.0

1.1%

1.3%

1.5%

Average UK electronics companies

32.2

28.1

23.7

25.0

23.0

17.7

1.3%

1.8%

1.9%

XP vs power converter companies

30%

44%

XP vs UK electronics companies

12%

23%

Source: Edison Investment Research, Refinitiv. Note: At 1 March.

Exhibit 14: Financial summary

£'m

2015

2016

2017

2018

2019

2020

2021e

2022e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

109.7

129.8

166.8

195.1

199.9

233.3

227.8

237.8

Cost of Sales

(55.1)

(67.8)

(89.2)

(102.8)

(109.8)

(123.2)

(123.3)

(127.4)

Gross Profit

54.6

62.0

77.6

92.3

90.1

110.1

104.5

110.4

EBITDA

 

 

29.7

33.0

41.7

49.2

44.5

56.8

54.6

58.4

Normalised operating profit

 

 

25.9

28.8

36.4

42.9

35.0

46.0

43.0

46.2

Amortisation of acquired intangibles

0.0

(0.4)

(0.6)

(2.8)

(3.2)

(3.2)

(3.2)

(3.2)

Exceptionals

(0.3)

(0.4)

(3.3)

(0.8)

(5.1)

(5.4)

(1.5)

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Reported operating profit

25.6

28.0

32.5

39.3

26.7

37.4

38.3

43.0

Net Interest

(0.2)

(0.2)

(0.3)

(1.7)

(2.7)

(1.7)

(1.5)

(1.3)

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Exceptional & other financial

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

25.7

28.6

36.1

41.2

32.3

44.3

41.5

44.9

Profit Before Tax (reported)

 

 

25.4

27.8

32.2

37.6

24.0

35.7

36.8

41.7

Reported tax

(5.5)

(6.3)

(3.6)

(7.2)

(3.2)

(4.0)

(6.3)

(7.1)

Profit After Tax (norm)

20.2

22.3

28.8

33.9

27.9

39.2

34.5

37.2

Profit After Tax (reported)

19.9

21.5

28.6

30.4

20.8

31.7

30.6

34.6

Minority interests

(0.2)

(0.2)

(0.3)

(0.2)

(0.3)

(0.2)

(0.3)

(0.3)

Discontinued operations

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

20.0

22.1

28.5

33.7

27.6

39.0

34.2

37.0

Net income (reported)

19.7

21.3

28.3

30.2

20.5

31.5

30.3

34.3

Basic average number of shares outstanding (m)

19.0

19.0

19.1

19.1

19.2

19.3

19.6

19.6

EPS - basic normalised (p)

 

 

105.3

116.2

149.4

176.1

144.1

201.8

174.3

188.4

EPS - diluted normalised (p)

 

 

104.3

115.3

147.0

172.8

141.4

198.4

171.4

185.3

EPS - basic reported (p)

 

 

103.7

112.0

148.3

157.8

107.0

163.0

154.4

174.8

Dividend (p)

66

71

78

85

55

74

94

98

Revenue growth (%)

8.5

18.3

28.5

17.0

2.5

16.7

(-2.4)

4.4

Gross Margin (%)

49.8

47.8

46.5

47.3

45.1

47.2

45.9

46.4

EBITDA Margin (%)

27.0

25.4

25.0

25.2

22.3

24.3

24.0

24.5

Normalised Operating Margin

23.6

22.2

21.8

22.0

17.5

19.7

18.9

19.4

BALANCE SHEET

Fixed Assets

 

 

65.4

73.2

88.1

129.2

137.4

135.2

141.4

143.5

Intangible Assets

48.2

53.0

63.9

97.7

99.6

98.8

105.4

107.8

Tangible Assets

16.1

19.1

22.5

30.7

35.9

33.5

33.1

32.8

Investments & other

1.1

1.1

1.7

0.8

1.9

2.9

2.9

2.9

Current Assets

 

 

53.5

65.7

83.5

105.1

96.0

107.0

106.5

114.3

Stocks

28.7

32.2

37.8

56.5

44.1

54.2

52.4

54.1

Debtors

17.5

21.5

23.8

33.0

34.8

30.2

37.4

39.1

Cash & cash equivalents

4.9

9.2

15.0

11.5

11.2

13.9

8.0

12.4

Other

2.4

2.8

6.9

4.1

5.9

8.7

8.7

8.7

Current Liabilities

 

 

(19.8)

(25.8)

(25.1)

(26.8)

(30.4)

(34.7)

(34.9)

(35.9)

Creditors

(14.6)

(16.1)

(21.4)

(22.4)

(25.2)

(28.3)

(28.5)

(29.5)

Tax and social security

(1.2)

(3.3)

(3.5)

(4.2)

(3.1)

(4.9)

(4.9)

(4.9)

Short term borrowings

(4.0)

(5.5)

0.0

0.0

(1.6)

(1.5)

(1.5)

(1.5)

Other

0.0

(0.9)

(0.2)

(0.2)

(0.5)

0.0

0.0

0.0

Long Term Liabilities

 

 

(10.0)

(6.2)

(29.6)

(70.1)

(64.1)

(43.0)

(36.3)

(29.6)

Long term borrowings

(4.6)

0.0

(24.0)

(63.5)

(57.3)

(35.2)

(28.5)

(21.8)

Other long term liabilities

(5.4)

(6.2)

(5.6)

(6.6)

(6.8)

(7.8)

(7.8)

(7.8)

Net Assets

 

 

89.1

106.9

116.9

137.4

138.9

164.5

176.7

192.3

Minority interests

(0.8)

(0.8)

(0.9)

(1.0)

(0.7)

(0.7)

(0.8)

(0.8)

Shareholders' equity

 

 

88.3

106.1

116.0

136.4

138.2

163.8

176.0

191.5

CASH FLOW

Op Cash Flow before WC and tax

29.7

33.0

41.7

49.2

44.5

56.8

54.6

58.4

Working capital

(4.6)

(6.1)

0.4

(21.6)

10.6

(6.2)

(5.2)

(2.3)

Exceptional & other

0.6

5.1

(6.3)

3.2

(4.4)

(1.7)

(1.5)

0.0

Tax

(4.7)

(4.1)

(6.1)

(4.1)

(4.5)

(3.3)

(6.3)

(7.1)

Net operating cash flow

 

 

21.0

27.9

29.7

26.7

46.2

45.6

41.6

48.9

Capex

(5.4)

(6.8)

(10.1)

(15.0)

(16.3)

(14.9)

(21.0)

(17.5)

Acquisitions/disposals

(8.3)

0.1

(18.3)

(35.4)

0.0

(0.5)

0.0

0.0

Net interest

(0.1)

(0.2)

(0.2)

(1.5)

(2.7)

(1.3)

(1.5)

(1.3)

Equity financing

0.0

0.2

(0.2)

0.6

0.5

3.5

0.0

0.0

Dividends

(12.2)

(13.1)

(14.2)

(15.6)

(17.2)

(7.3)

(18.3)

(19.0)

Other

0.2

0.0

0.0

0.0

(1.5)

(1.7)

(1.7)

(1.7)

Net Cash Flow

(4.8)

8.1

(13.3)

(40.2)

9.0

23.4

(0.9)

9.4

Opening net debt/(cash)

 

 

(1.3)

3.7

(3.7)

9.0

52.0

41.3

17.9

18.8

FX

(0.2)

(0.5)

0.6

(2.7)

1.7

0.0

0.0

0.0

Other non-cash movements

0.1

(0.2)

0.0

(0.1)

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

3.7

(3.7)

9.0

52.0

41.3

17.9

18.8

9.4

Source: XP Power, Edison Investment Research

Contact details

Revenue by geography

401 Commonwealth Drive

Lobby B #02-02, Haw Par Technocentre

Singapore, 149598

+65 64116900

www.xppower.com

Contact details

401 Commonwealth Drive

Lobby B #02-02, Haw Par Technocentre

Singapore, 149598

+65 64116900

www.xppower.com

Revenue by geography

Management team

CEO: Gavin Griggs

Acting CFO: Johan Olivier

Gavin was appointed CEO from the start of 2021, before which he served as the CFO. Prior to joining the group in October 2017, Gavin was CFO of Alternative Networks, a listed Telecoms and IT services business until December 2016 when it was acquired by Daisy, whereupon he became FD of the larger group. Gavin has worked in various senior international finance positions including roles at Logica, SABMiller, PepsiCo and Sodexo.

Johan joined XP Power in August 2018 as group finance director, responsible for financial planning and reporting and treasury. Prior to joining XP Johan worked in senior financial positions including Finastra, Logica and Subsea 7, prior to which he qualified as a chartered accountant with PwC.

Chairman: James Peters

James has over 25 years’ experience in the industry with Marconi and Coutant Lambda, before joining Powerline in 1980. In 1988, he founded XP Power. In 2000, he was appointed as European MD. In 2003, he was appointed deputy chairman and in 2014 became chairman.

Management team

CEO: Gavin Griggs

Gavin was appointed CEO from the start of 2021, before which he served as the CFO. Prior to joining the group in October 2017, Gavin was CFO of Alternative Networks, a listed Telecoms and IT services business until December 2016 when it was acquired by Daisy, whereupon he became FD of the larger group. Gavin has worked in various senior international finance positions including roles at Logica, SABMiller, PepsiCo and Sodexo.

Acting CFO: Johan Olivier

Johan joined XP Power in August 2018 as group finance director, responsible for financial planning and reporting and treasury. Prior to joining XP Johan worked in senior financial positions including Finastra, Logica and Subsea 7, prior to which he qualified as a chartered accountant with PwC.

Chairman: James Peters

James has over 25 years’ experience in the industry with Marconi and Coutant Lambda, before joining Powerline in 1980. In 1988, he founded XP Power. In 2000, he was appointed as European MD. In 2003, he was appointed deputy chairman and in 2014 became chairman.

Principal shareholders

(%)

Standard Life Aberdeen

14.9

Canaccord Genuity

8.6

James Peters

6.4

BlackRock

6.2

Janus Henderson

5.7

Artisan Partners

5.0

Van Lanschot Kempen

4.9

Mawer Investment Management

3.9

Jupiter Fund Management

3.8

SEB

3.6

Montanaro

3.4


General disclaimer and copyright

This report has been commissioned by XP Power and prepared and issued by Edison, in consideration of a fee payable by XP Power. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by XP Power and prepared and issued by Edison, in consideration of a fee payable by XP Power. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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